Bankruptcy and Financial Distress

Cornerstone Research has experience in fraudulent transfer litigation brought by bankruptcy trustees and creditors of distressed companies. We have analyzed whether:

• The company received a reasonably equivalent value in the transaction at issue.
• The company was insolvent on the date of the transaction at issue.
• The company becomes insolvent as a result of the transaction at issue.
• The transaction left the company with an unreasonably small amount of capital.
• The company incurred debts beyond a company’s ability to repay in connection with the transaction.

We have also analyzed whether:

• A single counterparty had excessive influence on a company’s decision making.
• Boards of directors received sufficient information to make decisions.
• Risk management efforts provided inadequate protection against a counterparty bankruptcy.
• The company made adequate disclosures related to possible financial distress.

Our experience includes a variety of securities and ERISA litigation related to bankrupt companies and distressed securities. We have addressed the oversight role provided by pension plan trustees and the roles of other parties involved in pension plan advice and administration.

Our staff have addressed the full spectrum of lender issues arising during and after bankruptcy proceedings, including challenges by unsecured creditors, equitable subordination motions, liquidation financing, the fiduciary duty of trustees and receiverships, bond defaults, loan foreclosures, and rating downgrades. We have valued loan portfolios on a historical basis and evaluated lenders’ risk positions, among other sophisticated fixed-income analyses..

In several deepening-insolvency matters we have worked on, plaintiffs have alleged that defendants’ misconduct delayed the bankruptcy filing, during which time the corporation’s debt continued to mount. We have applied rigorous approaches grounded in corporate finance theory and analyses of facts and circumstances in these cases.

Companies operating in the zone of financial distress present unique valuation challenges because the future value of their securities is much more uncertain than those of companies not operating in a zone of financial distress. In addition, future values of securities may follow nonlinear patterns that can make traditional valuation approaches unreliable. In many such cases, we use option-pricing approaches to arrive at estimates of value.

Valuing complex assets with option-like characteristics often requires using computer-intensive simulation methods instead of traditional formulas such as the Black-Scholes model. Cornerstone Research has worked with experts to build complex valuation and damages models for a range of assets with option-like characteristics.

Cornerstone Research has investigated whether a corporate parent and subsidiary have established themselves as genuinely separate entities. This work has included analyses of whether and to what extent assets and business functions were comingled and comparisons of how financial statements represented transactions by and between the entities. Our staff have also assessed how the parent and its subsidiary were financed historically, and how their capital structures evolved over time.

We have consulted on litigation surrounding distressed financial institutions, including suits and seizures by regulators. We have analyzed the causes of these firms’ failures, assessing the extent to which losses resulted from the companies’ own strategies and procedures versus industry and macroeconomic events. We have also conducted studies on whether regulators and management would have acted differently in the absence of various factors. And we have calculated the value of failed firms’ assets and liquidity positions at different points in time.

We have assessed whether and to what extent a company’s losses or failures result from any actions by auditors. These analyses have included identifying possible weaknesses in processes for internal controls, whether delayed or prolonged audits affected the firm’s performance, and how different actions by the auditors may have affected the decision making of managers, boards of directors, shareholders, or creditors. Our work has also included matters of compliance with different accounting standards, along with regulatory proceedings related to auditing.